Opening a Roth IRA for Your Kid

by Meg Favreau on 27 March 2012 6 comments
Photo: ElvertBarnes

My parents have done a lot for me. But one of the things I am the most grateful for is that they opened up a Roth IRA for me when I was in high school, the first year that the account was available.

Like many people, I didn't think much about long-term savings when I was younger. Most of my goals were relatively immediate, saving for things like a video camera, travel, or the security deposit for my first apartment. And I remained similarly short-sighted at my first couple of jobs post-college. Convinced I wouldn't be at my first job long enough for them to start matching my contributions, I passed on contributing to my 401(k). I felt extra sour about that particular company's retirement plan when I discovered that my holiday bonus — a deposit into my 401(k) — disappeared when I quit because I hadn't vested. So what did I do? I said "screw it" to retirement savings, and ignored the 403(b) at my next job, too.

Flash forward to now — after several years of freelancing and learning about finances, I wish that I had the foresight to set up a 401(k) when I could have. But that also makes me extra thankful for the retirement account I do have, and have had since my teens — my Roth IRA. (See also: Why Roth IRAs Are Ideal for Young Professionals)

Some Roth IRA Benefits

Anyone who has earned income can set up a Roth IRA, and the accounts are generally very easy to open.

Roth IRA account holders can withdraw any funds they contributed to their account, tax-free, at any time. While I don't think it's good practice to encourage people to tap into their retirement savings early, this can be helpful. For example, I once removed a couple thousand dollars from my Roth IRA so that I could buy an inexpensive used car without resorting to a loan.

Even some Roth IRA earnings can be withdrawn before retirement time under certain circumstances, such as when you're buying your first home.

Setting Up Roth IRAs for Kids

As I mentioned above, who has earned income can set up a Roth IRA. You can't pay your kid to do work, but if he has a summer or part-time job, he's eligible. Even cash jobs like babysitting can count. According to Janet Bodnar at Kiplinger's, if your child mows lawns for the summer, you just need to "keep careful records of each job...And it would make a stronger case if he mowed lawns not just for you but for other customers as well."

If your child has spent part (or, well, all) of her money, you can also kick in cash on her behalf — but the maximum contribution is $5,000 or the total of your child's earned income, whichever is smaller.

Bodnar also notes in her piece that some companies will not open accounts for children under 18. Others, do, however; just know you might have to search around a little bit to find one.

Did you set up a Roth IRA for your child? If so, what was your experience?

The post is part of the Roth IRA Movement.

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Guest

Contributions to a Roth IRA are not tax free. They are taxed at your current tax rate. Once you meet the age requirement of 59 1/2, the withdraws are tax free. Lucky your parents were never audited if they were reporting those Roth contributions as regular IRA contributions, as they are nit tax when invested but are taxed when withdrawn.

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Guest

WRong---you do pay taxes on Roth IRA contributions---so either your parents set up a regular IRA for you, or they have been doing their taxes incorrectly

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Jess

Would having a Roth IRA affect a student's financial aid come college time?

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Guest

This is a huge benefit for parents and children. The FAFSA which is the federal form that determines aid eligibility for most schools does not require you to report any funds in retirement savings accounts. However, they certainly do require you to disclose any college savings accounts or other assets. When determining aid eligibility the formula is usually about 30% of the students net assets per year, and 10% of the parents net assets per year as the "ability to pay" of student/parent contribution.

As such, putting money into a Roth IRA can allow the money to grow and be withdrawn to pay for college (from either a child's IRA if they have had at least 5k of earned income for each year that contributions were made) or from yours. This will allow you to maximize school financial aid and still save for college.

Meg Favreau's picture

Yikes! Thanks for the tax catch, folks. I've updated the article. I think my mom was misremembering that one. =)

Guest's picture

I think the hurdle is how to get earned income for our children as early as possible to make them eligible for the ROTH.